By Malini Bhupta
The Securities and Exchange Board of India’s (Sebi) disclosure framework for new-age technology companies, looking to go public, will have a sobering effect on valuations, according to investment bankers.
The market regulator’s consultation paper on Friday proposed disclosure of key performance indicators (KPIs) that these companies share with pre-IPO investors during fund-raising, which becomes the basis of valuations and even the issue price. Now, companies will have to disclose the KPIs and details on valuations three years prior to the IPO.
The consultation paper comes on the back of a sharp correction in the stock prices of the recently listed new-age tech companies, which are still loss-making. Shares of companies like Zomato, One 97 Communications (Paytm), Nykaa and PB Fintech have corrected sharply since listings. The regulator is seeking to provide more data and transparency to investors looking to invest in these high risk-high-reward companies.
Investment bankers say that in the short-term, some of these companies may have to go back and find ways to justify their valuations to investors, while those companies that already have sustainable business models will continue to tap public markets. However, those looking to tap markets now will have to work hard to justify valuations.
Raja Lahiri, partner-transaction advisory at Grant Thornton, says: “In my view, this is a good move by the Sebi to bring a transparency around pricing and valuation basis for new-age companies. Valuations and pricing, in my view, are a subjective process and perhaps, the theme of ‘sustainability’ needs to be embedded in valuations. Companies and their stakeholders are sure to take this into account in future IPO pricing.”
By enhancing disclosures, the regulator is working on the market’s maturity but it may not solve the problem of valuations necessarily, as these are subjective. The consultation paper hopes that these disclosures would enable investors to evaluate the opportunities better, but the investment thesis of venture capitalists is very different from retail.
According to Yatin Singh, Head-Investment Banking at Emkay Global, “The move will create information parity is the hope, but it doesn’t work that way as the risk-return appetite of venture capitalists is very different from those coming to public markets. It is hard to compare a preferential instrument with a common equity instrument. Disclosing KPIs is fine, but when you disclose funding series, then the justification is very different from common equity constructs.”
Last year, several new-age technology companies, without any financial track record, tapped the public markets at lofty valuations. Many of these companies are either near or below their issue price. Zomato is trading close to its issue price, while Paytm’s share price is down to `833 per share from its issue price of Rs 2,150 per share. Experts say that the regulator is keen to protect the capital of retail investors and prevent private equity and venture capitalists from exiting companies at the cost of retail investors.
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